Umbrella companies: they’re stripping the UK of its entrepreneurial spirit and economic growth

OPINION

If Britain’s millions of self-employed are increasingly being forced to pay for the privilege to work, then surely they should see some advantages. That just isn’t the case when it comes to the nation’s growing number of umbrella company workers, according to research from IPSE (the Association of Independent Professionals and the Self-Employed).

The lobby group’s research found that despite over a third (34%) of self-employed workers operating through an umbrella company, over 3 in 5 (61%) umbrella company workers believe that there are no advantages in operating via an umbrella company. The latest figures only add to the Off-payroll Legislative “side effects” that are piling up, which include:

• A rising number of unregulated umbrella companies launched since March 2021 and the number of contractors forced to join them, smacking of another loan charge crisis.
• Brain drain: British highly skilled talent compelled to move overseas to more contractor-friendly markets
• Deep dive in take-home pay, which means less spending for the greater good of the economy

Why are umbrella companies taking over freelancer independence?

The use of umbrella companies – which act as an intermediary between contractors and clients in the supply chain for payroll purposes – has grown substantially since the reforms to IR35 in the private sector in April 2021. Nearly 7 in 10 (69%) umbrella company workers have stated that their clients insisted they work through an umbrella company since the changes to off-payroll working last year.

Furthermore, almost two thirds (63%) stated that they had some level of choice but were given a limited range of umbrella companies to choose from whilst, concerningly, 5% were unable to choose their umbrella company and had to operate through one allocated to them.

However, despite self-employed workers being forced to operate via an umbrella company, over half of umbrella company workers (57%) believe that their role is outside of IR35 and that the supply chain won’t allow them to take the risk of working through their own limited company. 

What are the disadvantages of working via an Umbrella Company?

Despite the recent growth in the use of umbrella companies, IPSE’s research found that over 7 in 10 (74%) freelancers are dissatisfied about working via an umbrella company, with 1 in 2 (50%) very dissatisfied.

When asked why they are dissatisfied, 8 in 10 (80%) umbrella company workers cited the fact that they have to cover the liability for Employer’s National Insurance, and where applicable, the Apprenticeship Levy, through a reduction in their day rate.

The report also found that the majority (70%) of umbrella company workers believe that they have lost their independence and ability to work however they wish since joining an umbrella company.

Andy Chamberlain, Director of Policy at IPSE (the Association of Independent Professionals and the Self-Employed), said: “The fundamental problem here is that people are being forced into pseudo- employment relationships they do not want.

“Since the IR35 changes came in a year ago, thousands who proudly consider themselves to self-employed are being pushed into umbrella companies under disadvantageous conditions, often without even a choice over which umbrella company they use.”

Call to action

IPSE has shared its report findings with the government following their recent call for evidence and we hope that they listen to us and the many umbrella company workers that have failed to see the benefits of working via an umbrella company.

Chamberlain said,

“We hope that they put forward recommendations that stop freelancers from being forced into working for umbrella companies that limit their independence and give them no real benefits.”